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Federal Court of Appeal acknowledges “non-infringing alternative” defence for the first time in the assessment of damages for patent infringement

On July 23, 2015, the Federal Court of Appeal held that the availability of a non-infringing alternative may be a relevant consideration when assessing damages for patent infringement (2015 FCA 171). Nevertheless, the extent to which this decision will actually affect the quantum of damages awards in future patent infringement cases in Canada remains unclear.

The decision appealed

The Court of Appeal’s decision overturns the reasoning of the 2013 decision of Snider J. of the Federal Court, who had held that the availability to a defendant of a non-infringing alternative (i.e., a product that could have been manufactured and sold in place of the infringing product manufactured and sold by the defendant) is not and should not be a relevant factor in the assessment of damages (2013 FC 751). In this regard, Snider J.’s decision was consistent with prior Federal Court decisions on this issue.

In this particular case, Snider J. found the defendants Apotex Inc. and Apotex Fermentation Inc. (collectively, “Apotex”) liable for damages following their infringement of a product-by-process patent for the anti-cholesterol drug lovastatin owned by Merck & Co Inc. and licensed to Merck Canada Inc. (collectively, “Merck”). Apotex argued that the damages owed should be reduced because it had available to it a non-infringing alternative process for producing lovastatin that Apotex could and would have used had it not infringed. Snider J. dismissed this argument in a section spanning nearly 30 pages of her reasons. The point became the central issue on appeal.

Causation principles underlying the calculation of damages

Pursuant to the Canadian Patent Act, a person who infringes a patent is liable to the patentee for all damages he has sustained by reason of the infringement. Canadian courts have long held that this phrase “by reason of the infringement” invokes the principle of causation, i.e., scrutiny of the causal relationship between the wrongful conduct of the defendant and the injury suffered by the plaintiff. As such, a plaintiff-patentee is entitled to recoup all damages that it has established would not have occurred “but for” the defendant’s infringement. Typically, this principle entitles the patentee to the hypothetical profits from the sales that it can establish it would have made “but for” the presence of the defendant’s infringing product in the market.

Snider J. held that the fact “that the defendant could have used a non-infringing alternative (but did not)” was irrelevant to the foregoing analysis, as its proper focus ought to be on the infringer’s actual actions and not its hypothetical actions.

In this respect, the Court of Appeal held that Snider J. erred and conflated the legal relevance of the non-infringing alternative with the availability of the non-infringing alternative in fact. Indeed, the Court of Appeal held that ignoring this consideration could actually over-compensate the patentee. That is, if damages for lost profits are calculated without regard to an available non-infringing alternative, the patentee would sometimes be better off than it would have been in the absence of infringement because, in the “but for” world, the infringer could and would have made and sold a non-infringing alternative that would have legitimately reduced the patentee’s sales.

As such, in the Court of Appeal’s view, achieving “perfect” compensation for the patentee requires consideration of (a) what, if any, non-infringing product the defendant or any other competitors could and would have sold “but for” the defendant’s infringement and (b) the extent to which such lawful competition would have reduced the patentee’s sales.

Other jurisprudence as support

In support of its analysis, the Court of Appeal cited jurisprudence from the U.S. as well as the Supreme Court of Canada and distinguished certain U.K. decisions that had previously been followed by Canadian courts.

In reviewing the U.S jurisprudence, the Court of Appeal noted that U.S. courts have held that if a non-infringing alternative that a defendant could and would have used, had it not infringed, is a true substitute and a real alternative to the infringing product, and would have replaced all infringing sales, the infringement causes the patentee to suffer no compensable damages, for two reasons. First, a truly fair and accurate reconstruction of the “but for” world must also take into account relevant, alternative actions that an infringer foreseeably could and would have undertaken had it not infringed. Second, only by comparing the patented invention to non-infringing alternatives can a court discern the market value of the patent owner’s exclusive right and therefore its expected profit.

The Court of Appeal also cited the Supreme Court of Canada’s decision in Monsanto Canada v Schmeiser (2004 SCC 34), which affirmed that the availability of a non-infringing alternative is relevant to the assessment of an accounting of the defendant’s profits, an alternative remedy to a recovery of the plaintiff’s damages in Canada. The Court of Appeal took the view that the same principle of causation underlies both remedies and, as such, there is no reason in principle to ignore the availability of a non-infringing alternative when calculating the patentee’s lost sales.

The Court of Appeal also considered jurisprudence from the U.K., where, unlike the U.S., it has long been held that the availability of a non-infringing alternative is irrelevant to the assessment of damages for patent infringement. Prior Canadian decisions had followed this U.K. jurisprudence. However, the Court of Appeal found the U.K. law to be based on public policy rather than the principle of causation. In addition, the Court of Appeal found that the Canadian decisions that had followed the U.K. practice had inappropriately fixated on the defendant’s actual conduct rather than its hypothetical conduct in the “but for” world and provided little by way of actual causation analysis. The Court of Appeal found that those earlier decisions “do not accord with the requirement in section 55(1) of the PatentAct that the damages be sustained ‘by reason of the infringement’.”

Policy rationale

Snider J. also rejected the relevance of a non-infringing alternative on the basis of several policy reasons, which generally centered on the view that considering this factor would result in inadequate compensation for the injured patentee and allow the infringer to escape responsibility for its infringement. As explained above, the Court of Appeal countered that consideration of this factor would actually result in “perfect compensation” – albeit less than the patentee might feel entitled to. Moreover, the availability of other remedies (e.g., elevated costs, injunctive relief for the remaining duration of the patent, an accounting of the infringer’s profits, punitive damages) would in the Court of Appeal’s view counterbalance any risk of immunity from liability or incentive to infringe.

Legal test to be applied

With these principles in mind, the Court of Appeal proposed a new legal test for determining the relevance of a non-infringing alternative based on the facts of a given case:

Is the alleged non-infringing alternative a true substitute and thus a real alternative?

Is the alleged non-infringing alternative a true alternative in the sense of

being economically viable?

At the time of infringement, did the infringer have a sufficient supply of the non-infringing alternative to replace the non-infringing sales? Or rather, could the infringer have sold the non-infringing alternative? To satisfy this step, the alleged alternative must have been actually available to replace the infringing sales as they were made.

Would the infringer actually have sold the non-infringing alternative?

The burden lies on the defendant to establish the factual relevance of a non-infringing alternative pursuant to this framework on a balance of probabilities.

Application to the facts of the case

The Court of Appeal held that, on the one hand, Apotex had at all relevant times the capacity to manufacture and sell non-infringing lovastatin in sufficient quantities. On the other hand, Apotex failed to meet its burden of showing that, notwithstanding this capacity, it could and would have sold this non-infringing alternative in place of the infringing product.

Rather, at some point during the relevant time period, Apotex had ceased manufacturing operations of the non-infringing lovastatin, which would have taken several weeks to ramp up sufficiently again. As such, the alleged non-infringing alternative was not actually available to replace Apotex’s infringing sales as they were made.

In any event, the Court of Appeal held that Apotex likely would not have replaced its infringing sales with sales of the non-infringing alternative because of, among other reasons: the scale of Apotex’s infringement; its likely knowledge that its supplier was providing it with infringing lovastatin; its belief during the relevant time period that the Merck patent was invalid; its failure to adduce evidence that had it known the product was infringing it would have resurrected its manufacturing operations of the non-infringing alternative; and its failure to adduce evidence demonstrating that the profits it would have made from sales of the non-infringing alternative would have been greater than the value lost by reallocating resources to do so.

In light of these conclusions, the Court of Appeal held that the availability of a non-infringing alternative was not relevant on the facts of the case. As such, the appeal was dismissed – effectively upholding Snider J.’s decision, including the award of close to $120-million CAD in damages to Merck, plus interest, although guided by quite different reasoning.

Conclusion

As noted above, this decision is arguably a departure from past Canadian jurisprudence that had rejected the relevance of a non-infringing alternative in the assessment of damages for patent infringement. At the same time, the application of this analysis to the facts in the case highlights how difficult it may be for defendants to establish the existence and relevance of a non-infringing alternative in a particular case. Further understanding of the scope and effect of the decision will no doubt come with further decisions on patent infringement damages in Canada.

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